Heads or Tales? The 2 Sides to Cryptocurrency
Money/currency has gone through many incarnations during the course of human history; from beads and shells, to chits and writs, to precious metals (and many rue the day we got off the gold standard), to the paper money and digital transactions we are familiar with today.
Enter Cryptocurrency, a hot topic that pundits say is a flavour-of-the-month - yet another get-rich-quick Ponzi scheme - while advocates are touting it as the changing of the guard for an improved world economy.
Whatever one’s stance may be, cryptocurrency is making a push to seriously compete with fiat money and has clearly trickled down to Joe and Jane Mainstream. It has the potential to be highly lucrative (as it was for early adopters) despite its volatility, or perhaps because of it. Then again, many have lost their life-savings in an eye-blink.
When every second commercial for a major sporting event is crypto-related, and celebrities hawk the newest crytpo trading sites, it’s obvious that interest in Bitcoin (and its derivatives) is embedding itself into the social media mainstream consciousness, particularly as people lose faith in the traditional government institutions and traditional fiat money and keep a close eye on recent border excursions.
So is this a case of the greater fool theory? Or perhaps it’s some sort of “greater good theory”? Regardless of stance, with popularity comes polarisation. There are 2 distinct sides to this rickety picket fence. So is cryptocurrency good or bad? Let’s look at it from both perspectives.
A Brief Overview
First, let’s delve into some history of crypto mining & block-chaining. In the early 1980s David Chaum invented a “blinding” algorithm that allowed for secure, unalterable information exchanges between parties (which in fact remains central to modern web-based encryption). This laid the cryptocurrency’s technical foundations.
Around 15 years later, Wei Dai published a white paper on b-money on the cypherpunks mailing list outlining a virtual currency architecture that included many of the basic components of modern cryptocurrencies, such as complex anonymity protections and decentralisation, suggesting the idea of a new form of money that uses cryptography to control its creation and transactions. However, at this point b-money was not implemented as a means of exchange.
Enter the enigmatic Satoshi Nakamoto, either a pseudonymous person or group depending on which rumour one subscribes to. Het/it They are credited as the first to publish the Bitcoin specifications and proof of concept in 2009 on a cryptography mailing list. This anonymity often raised concerns, many of which are still linked to the misunderstanding of the open-source nature of Bitcoin.
It’s argued that the original idea of cryptocurrency to was to apply cutting-edge mathematical and computer science principles to create a finite amount of virtual “coins” that would never increase, thus solidifying the value and integrity of the income source — free of politics and agendas, a falsely inflated market, various monies value recognition on the world market, and to eliminate printing money on an ad-hoc basis to falsely balance Institutions’ books.
Bitcoin and its Alternatives
First out of the gate, Bitcoin was (and still is) the cryptocurrency standard. But by late 2010, dozens of similar cryptocurrencies to Bitcoin (also known as “altcoins”) began appearing and more spring into being every month, although few cryptocurrencies other than Bitcoin are currently widely accepted for merchant payments. The first public Bitcoin exchanges appeared around this time as well.
The most popular of these “altcoins is Ethereum (ETH), which was launched in 2015. It makes some noteworthy improvements to Bitcoin’s basic architecture, in particular the utilisation of “smart contracts” which enforce the performance of a given transaction, compel parties not to renege on their agreements, and contain mechanisms for refunds should one party violate the agreement. Other alternatives include Litecoin, Ripple, Dogecoin and the now worthless Coinye (which is a great example of the volatility of the crypto market).
Bitcoin Creation and Mining
From a high-level user perspective, Bitcoin is essentially a mobile app or computer program that provides a personal Bitcoin “‘wallet” that allows a user to send and receive bitcoins. This is how Bitcoin works for most users. However, a deeper dive shows us the Bitcoin network is sharing a public ledger called the “block chain” which encapsulates every transaction ever processed, allowing a user’s computer to verify the validity of each transaction. The authenticity of each transaction is protected by digital signatures corresponding to the sending addresses, allowing all users to have full control over sending bitcoins from their own Bitcoin addresses.
Bitcoins (and its derivatives) are created at a decreasing and predictable (fixed) rate. The number of new bitcoins created each year is automatically halved over time until bitcoin issuance ceases completely when a total of 21 million bitcoins come into existence. However, this will never be a limitation because transactions can be denominated in smaller sub-units of a bitcoin, such as bits; there are 1,000,000 bits in a single bitcoin. Bitcoins can be divided up to 8 decimal places (0.000 000 01) and potentially even smaller units (if that is ever required in the future) as the average transaction size decreases.
Anyone can process transactions by running software with specialised hardware to earn transaction fees paid by users for faster transaction processing, and by newly created bitcoins issued into existence according to a fixed formula. This is often called “mining” and utilises vast amounts of power and resources (more on that later).
As more people clamour to “head north with their prospecting pans”, mining has become a very competitive business where no individual miner can control what is included in the block chain.
Proponents of cryptocurrency laud that cryptocurrency users experience benefits not available to users of traditional fiat currencies and the financial systems that those currencies support, due to such things as the independence of political agendas and supposedly impenetrable data security. The following are some of the main reasons people support cryptocurrency:
Bitcoin was designed to be an absolute secure system. The decentralisation fuelling blockchain technology means that if a malicious hacker attempts to hack a cryptocurrency to modify a record or falsify a transaction, it would involve hacking the majority of computers involved in the cryptocurrency. Over the course of the last few years, security features have quickly developed, such as wallet encryption, offline wallets, hardware wallets, and multi-signature transactions.
Additionally, every cryptocurrency holder has a private key that authenticates their identity and allows them to exchange units. Users can make up their own private keys up to 78 digits long, or use a random number generator to create one. Once they have a key, they can obtain and spend cryptocurrency. Without the key, the holder can’t spend or convert their cryptocurrency — rendering their holdings worthless unless and until the key is recovered. Because of this, cryptocurrency holders are usually very protective of their private keys, typically storing them in multiple digital locations — although generally not Internet-connected, for security purposes — and on paper or in other physical form.
Bitcoin payments can be made without personal information tied to the transaction. This offers strong protection against identity theft.
As far as Bitcoin mining is concerned, miners are neither able to cheat by increasing their own reward nor process fraudulent transactions that could corrupt the Bitcoin network, because all Bitcoin nodes would reject any block that contains invalid data as per the rules of the Bitcoin baked into the protocol. Consequently, the network remains secure even if not all Bitcoin miners can be trusted. Additionally, the act of mining is itself a built-in quality control and policing mechanism for cryptocurrencies. Because they’re paid for their efforts, miners have a financial stake in keeping accurate, up-to-date transaction records — thereby securing the integrity of the system and the value of the cryptocurrency.
Payment Freedom and Fees
It is possible to send and receive bitcoins anywhere in the world at any time without the restrictions of bank holidays, international borders or red-tape bureaucracy. Bitcoin allows its users to be in full control of their money.
There is no fee to receive bitcoins, and many wallets let you control how large a fee to pay when spending, as fees are unrelated to the amount transferred, so it’s possible to send 100,000 bitcoins for the same fee it costs to send 1. Additionally, Cryptocurrencies’ security features eliminate the need for third-party payment processors (like PayPal or Visa, for example) to authenticate and verify every electronic financial transaction. Because cryptocurrency users have full control of their transactions, it is impossible for merchants to force unwanted or unnoticed charges like what can happen with traditional payment methods.
Cryptocurrencies don’t differentiate between international transactions and domestic transactions. Transactions are either free or come with a nominal transaction fee, no matter where the sender and recipient are located. Moreover, all information concerning the Bitcoin money supply itself is readily available on the block chain for anybody to verify and make use of in real-time.
Although mining periodically produces new cryptocurrency units, most cryptocurrencies are designed to have a finite supply, much like precious metals, which makes them intrinsically deflationary. This is opposite to fiat currencies that central banks can, in theory, produce unlimited supplies of, which often leads to an upwards inflationary spiral.
If current trends continue, it is predicted that the last Bitcoin unit will be mined sometime in the mid-22nd century, so the fear of “running out of Bitcoin” is a non-issue for quite awhile.
There is nothing to stop users from getting into cryptocurrency. With a few Internet searches and reasonably current equipment, one can set up their computer to start mining coins. And while the bubble has burst for serious money to be made in mining coins without a massively-powered set up, it is still possible to set up a computer to generate some extra cash on some of the lesser-known alt-coins.
There is much more under the hood than a simple resistance to change. True global scaling/embracement, speculative investment, benefits to only early adopters, professional day traders and the criminal element are among the reasons that many shun even the concept of cryptocurrency.
Perhaps one of the most intriguing arguments against bitcoin comes from one of the more well known programming language maintainers (C++) Bjarne Stroustrup, himself. He has publicly stated that he does not like the fact that Bitcoin was written in C++.
“So, I’m very happy and proud of some of the things [that] C++ is being used [for], and some of the things I wish people wouldn’t do. Bitcoin mining being my favorite example, [it] uses as much energy as Switzerland and mostly serves criminals.”
Here are some of the main negative arguments about cryptocurrency:
Making serious money from mining requires the commitment of a plethora of specialised computers and hardware.With all of this equipment required for a single serious miner, compounded with the sheer amount of people seeking their fortune in crypto mining, the energy usage and carbon footprint is, well, stripped of any candy-coating, bad for the environment.
The biggest culprit is Bitcoin, which the Cambridge Centre for Alternative Finance estimates accounts for more than 0.5% of global energy output. The NY Times puts it into further perspective, stating that “The process of creating Bitcoin to spend or trade consumes around 91 terawatt-hours of electricity annually, more than is used by Finland, a nation of about 5.5 million.” Compound this with the fact that some of the world’s largest Bitcoin mines were located in largely coal-powered countries like China and Russia and it’s not hard to see that there is an issue here.
Volatility and Speculation
While potentially a lucrative “alternative” investment option, only a handful of serious financial professionals view cryptocurrency as suitable for anything other than pure speculation. While making tangible gains is entirely possible in a volatile trading environment, it also means you can lose a lot with just one small mistake or one hot minute.
Not being controlled by traditional central banks means a cyrptocoin’s value is whatever buyers on the open market will pay. But it also means there’s nothing binding any coins’s value to reality, and any one could (and has) become worthless in an instant once it’s demand diminishes.
While designed from inception as a very secure system, the achilles heel is the same as with any cybersecurity platform: the user. Although the Bitcoin network itself remains unhacked to date, a number of the surrounding software tools that interact with the network have been infiltrated and misused.
Simply put, if someone gets into your cryptocurrency wallet, they can steal your coins. Essentially, If a hacker is able to send a directive to the exchange to conduct a transaction, they do not need to hack the cryptocurrency. Instead, their fraudulent order will read as a legitimate transaction and will be accepted by the rest of the blockchain. The result, your money is lining someone else’s pocket and there is bugger all you can do about it.
This can occur from poor password hygiene, to leaving your computer unattended, using dodgy exchange sites, ad nauseam (for tips on computer security click here). Note that this has nothing to do with the security of the cryptocurrency as a whole as the same thing applies if a trading exchange is hacked; you could lose out big through no fault of your own.
There are myriad examples of large losses occurring in this way, and the number will likely increase as more uninformed users chase the rainbow.
Even the most legitimate seeming company in the cryptocurrency space is more volatile and can be at more risk than those in other industries. And there are still assholes who hope to scam the unaware.
Ironically, the same strengths that make it difficult for governments to seize and track cryptocurrency also allow criminals to operate with relative ease. Many grey and black market online transactions and money laundering operations are sourced in Bitcoin and other cryptocurrencies.
Although the IRS applies the same taxation guidelines to all cryptocurrency payments by and to U.S. persons and businesses, many countries don’t have such policies in place. So the anonymity of cryptocurrency makes some tax law violations, particularly those involving pseudonymous online sellers, difficult to track.
The bottom line is that Bitcoin is money, and money has always been (and always will be) used both for legal and illegal purposes.
Harder to Implement Financial Cessation
Without getting too topical, one would find it hard to ignore the Russian/Ukrainian incursion that is going on. Economic sanctions are the main tool that the rest of the world is using to attempt to quell Russia’s activities. Cryptocurrency makes it more difficult (but not impossible) to entirely freeze or seize bank assets, due to the fact that the funds and transactions are stored in numerous locations across the globe.
Blockchain technology is relatively new and hard for many to truly grasp all of its nuances. As a result, it is marketed to the mainstream as a modern-day cure-all snake oil. Several companies and celebrities are using their brand/social-media awareness to tout their own coins or NFTs, falsely legitimising the fortunes that can be made.
Bitcoin software is still in beta with many incomplete features in active development. Additionally, most Bitcoin businesses are new and still offer no insurance. In general, Bitcoin is experiencing classic financial growing pains that will only increase as adoption supersedes regulation.
While it’s true that scarcity helps add value to some things like finite precious resources, and art, scarcity alone doesn’t translate into value. In order to create lasting value, Bitcoin needs more than just scarcity and flavour-of-the-month popularity.. Being limited at 21 million isn’t enough to warrant a valuation as high as the world’s most valuable companies.
At this point, Bitcoin’s value is attached to the buzz around it. If it loses that, it may never reach its prior heights.
Bitcoin isn’t solving a real problem
Many feel that Bitcoin exists not because it’s needed, but merely because it can exist. While there are real-world use cases for it, the idea that Bitcoin will replace fiat money is still just bowl residue in a pipe-dream bong.
And, the doozy…
“Not your keys, not your crypto anymore.” Cliché, granted, but that’s the whole point of crypto. It isn’t self-ownership if it’s not in your private wallet.
The Programmer’s Perspective
There is a valid argument that aside from early adopters and those who have cashed-out big with cryptocurrency, blockchain developers are the most excited about blockchain technology.
And it’s almost ironic that the foundations of cutting-edge blockchain are JS, Python, and Java — old school tech, to say the least.
Having said that, blockchain is expanding our horizons for the approach to writing new software.
For one, it almost forces programmers to create a consensus of created algorithms that allow multiple machines to work well together. Secondly, blockchain usage typically involves money which ups the stakes for releasing bug-free software. A third off-shoot benefit is that blockchain developers tend to simplify languages and are less inclined to syntax sugarcoat their code for purely aesthetic reasons, so both the programmer and code reviewer are more likely to completely understand and prove the code. A more streamlined language is coveted, I daresay.
Next, by embracing digital signatures, blockchain encourages regular developers to think about adding digital assurance and keeping a secure log of everything that changes. This offers an entirely different layer of security that links a transaction to someone who holds the private key.
Finally, blockchain opens up the previously hidden transaction log from SQL databases due to lack of a way for an API or average programmer to interact with it by making it easier for users to follow the history of any cryptocoin from its inception.
It will be interesting to see how the fate of the cryptocoin will play out. Potential often doesn’t morph into excellence or even reasonable execution. As with many other things, people are looking for change, a better way, an easier way. Or how to make more money without having to work for it..
And as with everything else, time, experience, safety, education, and a good ole’ dose of discerning scepticism are good things to embrace before diving headfirst into a murky pond.
As coffeezilla sarcastically and brilliantly points out, be careful who you listen to. Quack-pots like Max Keiser are a big reason that Bitcoin can easily be viewed as a Ponzi-esque scam supported by not only those that made the kool-aid, but were the first to drink it. What else can explain how crypto is referred to by some “advocates” as an actual life form in cyber space — a living, breathing creature? I wonder if it will do seminars in some celebrity’s compound in the metaverse and charge itself to attend?